EU’s financial sector to serve the economic progress

Michel Barnier, a member of the European Commission, responsible for Internal Market and Services took part in the European Financial Centre Roundtable (Brussels, 6 September 2012) with a speech called “Making financial centres contribute to the wider economy”. The Commissioner described the present state-of-the art of the present EU governance role in finances-economy interdependence in Europe.

Five years after the start of the financial
crisis, the economic situation in Europe remains fragile: still zero growth is
expected in Europe this year; unemployment in the euro area is at 11 per cent
(and above 22 per cent for young people), and many companies have trouble
finding finance for new projects.

EU’s financial governance

The June 2012, the European Council has
agreed on significant measures to step up Europe's financial governance. For
the first time, the EU-27 has a comprehensive agenda to address Europe's
challenges.

More specifically, the Council has agreed to:

build a
banking union;

increase
budgetary integration; and

achieve a
genuine Economic and Monetary Union.

The Commissioner underlined that Europe's
financial centres also have key roles to play in the post-crisis recovery in at
least two aspects:

First,
they should be capable of meeting the needs of and supporting their economies
and societies. The quality of services they provide to domestic firms is
essential to the efficiency and competitiveness of their countries.

Secondly,
financial centres should be key elements of the European single market. But
their role should go much further than only facilitating free movement of
capital.

More specifically they should perform at
least the following functions:

They should support and strengthen the connections across a wide range of
economic sectors.

They should provide
employment opportunities in all types of services typically present in a
financial centre.

They should contribute to true innovation and productivity.

And lastly - they should be Europe’s gateways to the global financial markets. As such, they
have the potential to improve the efficiency of Europe’s economy and help us
compete globally.

Besides, Europe's financial centres are a
central part of the global financial system. This is because they provide a
global hub for financial institutions, firms and investors. And - as such -
they secure for everyone the benefits that wider, deeper and more integrated
markets can offer.

Reference: Press Release, SPEECH/12/589, 6 September
2012. Michel Barnier, Member of the European Commission, responsible for Internal Market and
Services.

Europe's financial centres: challenges

The Commission’s approach to reforms in the
sector is based on two approaches:

First, the EU needs
to stabilise the financial sector and re-establish confidence. The EU is approaching the end of its largest
ever program of financial services reform. Financial markets have been at the
heart of the recent financial crisis.

Second, the EU needs
to put in place measures to ensure the financial sector supports healthy growth
and investment. As a result, it became clear that the financial services sector
could not escape reforms. Moreover, the experiences during the crisis have
clearly demonstrated that the member states need common European rules.

The so-called single rulebook will contribute
to creating a more stable, transparent and competitive financial sector in
Europe.

Against this backdrop, around thirty targeted
measures have been proposed by the European Commission (its goal is to make new
legislation to be enforced by 2013).

This considerable reform program now
addresses all the key commitments agreed at the G-20 agenda. It puts Europe at
the forefront of the global effort to positively transform the financial sector
and financial centres.

Critical approach

The Commissioner said that some commentators
criticised the EU financial reform agenda to the detriment of economic growth.

They argue that the new rules:

are excessive,

create unnecessary red tape and

impose significant costs on financial
institutions,

He provided three answers to these arguments:

1. First, European states are part of a
joint, international effort to stabilise the financial sector.

2. Secondly, there is no one silver bullet to
address all the shortcomings that contributed to the crisis. Instead, a series
of targeted measures is needed to reform financial institutions,
infrastructures and instruments.

3. Lastly, each of our proposals is carefully
calibrated to be bearable for the financial sector and to support the real
economy.

In particular, the EU is careful to allow
time for financial institutions to adapt to new requirements. For example, the
Commission has proposed that the new bank capital requirements should only
enter into force at the end of this decade.

The EU also paid great attention to the
economic impact of present reforms, especially on SMEs. For example, Commission’s
proposal for revised legislation on securities markets will be beneficial for
SMEs seeking funding via financial markets. This is thanks to the SME labels
and more relaxed rules on listing and reporting.

Then, the Commissioner concentrated on the
topic of sustainable growth, which is the second
pillar of the EU’s reform program. Bringing Europe back to the path of
sustainable growth requires taking up a series of challenges. Amongst them:

the EU-27 needs to build modern digital, energy
and transport infrastructures;

the EU needs to support the development of
innovative technologies; and

the EU needs to tackle climate change and
population ageing.

All these challenges require long-term
financing; given the state of public finances, it is clear that not all
long-term financing needs can or should be met by European taxpayers.

Financial canters’ tasks

Here again the financial centres have a key
role to play; they should perform at least three tasks:

First, they need to provide a stable platform
for institutional investors such as pension funds and insurers to match their
long-term liabilities with long-term assets;

They should also offer safe and profitable
vehicles for household savings;

Lastly, they need to support sustainable, green
and socially-responsible economic growth.

In this respect, the Commission is currently
examining how to ensure that the financial sector is fulfilling these roles as
efficiently and effectively as possible. The Commission plans to launch a broad
consultation on this subject around the end of 2012. In the meantime, the
Commission takes action in relation to investment funds, which play a crucial
role in financing the European economy.

More specifically, the Commission has
proposed to create a European market for
venture capital and socially-responsible investment funds. Such a market
will allow these funds to raise money and to invest anywhere in the EU. This
will increase chances for start-ups and companies involved in social and
environmental activities.

The Commission also wants to build further on
the success of the UCITS brand. Some member states have rules in place which
facilitate access to long-term investments in private companies for retail
investors. Drawing on this experience, the Commission is currently reflecting
on whether an EU approach in this context could also help boosting growth in
Europe.

Financial reforms in the EU

The reforms proposed by the Commission are
concentrated on the following issues (the reforms that are still to come are
based on the EU original financial regulation program which is nearing completion).
But the reform process is not yet over as new challenges and priorities emerge.
Therefore the process of transformation in Europe's financial sector needs to
continue. The Commissioner mentioned three
issues that we will need to deal with in the next few months:

First, the European banking union: it is needed to break
negative interconnections between banks and governments. Following the June
European Council, the Commission will shortly present a legislative proposal to
establish a single supervisory mechanism as an essential first step towards the
banking union.

Second, the structure of the EU's banking
sector. Interesting work has been launched at national level: e.g. the Vickers
Report in the United Kingdom or the Volcker Rule in the United States. But in a truly integrated
single market, these things shall be worked out together, not separately.

With this point in view, the Commission set
up an independent High-level Expert Group headed by Erkki Liikanen, Governor of the Central Bank of Finland. The Group
is finalising its work in October 2012; then the Commission will evaluate its
recommendations and respond as appropriate.

Third,
shadow banking. Non-bank credit
activity performs important functions in the financial system: it creates
additional sources of funding and offers investors alternatives to traditional
bank lending. However, as the crisis has demonstrated, shadow banking can also
pose potential threats to long-term financial stability.

Following the Commission consultation at the
start of 2012, it was decided that some appropriate next steps would be taken,
including legislative measures - if necessary.

New challenges

Growth and stability in Europe is having two
equally essential reform pillars. They also remind about the need to be
sensitive to potentially unintended consequences of these reforms. “We need to
continue to assess their impact and stand ready to adjust our proposals if
necessary”, argued the Commissioner.

The driver behind the EU’s agenda has always
been the growth of the real economy and the need to support European
competitiveness. To achieve this, the Commission needs a competitive, strong
and healthy financial sector, rooted in successful, responsible and safe
financial centres.

Therefore, the EU-27 needs to pursue the
reforms to make sure that Europe's financial sector and its centres can perform
their national, European and global tasks in a safe, efficient and effective
manner.

“We have made a lot of progress to date, but
there is still more to do”, concluded the Commissioner.

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